Esther Ang asked 5 months ago
Hi there,
A large part of LINK Reit's earnings are from its HK retail segment. However HK's retail sector is facing multiple changes and challenges, some of which seem to be structural and pretty permanent (eg. locals going to Shenzhen for shopping). The rental reversion from this sector has been negative. Hence, what is your assessment on this risk to LINK Reit and its ability of overcome and still grow its retail and overall business sustainably? Thank you!
Rusmin Ang Staff answered 5 months ago
Hi Esther
Locals going to SZ to shop is nothing new before Covid but the trend grew stronger over last couple of years due to macro slow down in HK. HKer may find it cheaper to spend their money in SZ and that's the reason why the recovery is very slow for both MPACT and Link REIT. I think Link REIT suburban malls are more resilient to counter this negative trend and that's why we are comfortable to hold and wait out for the storm. The market already priced in the negativity on this end but we could still be wrong if more HKer visit SZ more frequently which mighty drag on their tenant sales and rent renewal further. That's why I highlighted this as the main risk. Other than that, the interest rate saving, fund management business and improvement in macro situation in HK will be a bonus to drive the share price.
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Their occupancy cost is one of the lowest which means that their rental is already quite affordable. Link Manager can change out the tenants who are badly affected by Northbound spending and replace them with tenants that are more resilient. When that happens, we should be able to see improvement in tenant sales as well. The reversion is only slight negative, not something I would worry for now. The valuation already trades at 08/09 level where market already treat them like deep crisis mode.
If it doesn’t fit your risk appetite, stay out! Crisis usually have a lot of bad news, not easy to hold through them. Next few quarters might have more bad news… We are prepared for it.